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Land Securities buys Bluewater stake

Bluewater is the top retail park outside London, but rental growth could be a challenge.
July 1, 2014

■ Further progress in building a leisure portfolio

■ Increasing retail rents still some way off

■ Strong development pipeline

IC TIP: Hold at 1,039p

Land Securities (LAND) is best known for its London development pipeline, which includes the bulbous Walkie Talkie skyscraper due to open in August and a prominent site opposite Victoria Station. More discretely, however, the real-estate investment trust has also been building up a portfolio of leisure assets. This is where its latest acquisition - a £656m 30 per cent stake in mega-mall Bluewater - fits it.

For an extra £40m, the deal includes asset management rights and the purchase of 110 acres of surrounding land. The overall net initial yield on purchase, after expiry of rent free periods, was 4.1 per cent. Bluewater, in Kent, is one of Britain's largest shopping centres. Its 1.8m sq ft house over 330 outlets and attract 27m visitors every year. The purchase follows the sale of The Bridges mall in Sunderland for £152m - a net initial yield of 6.9 per cent.

Land Securities hopes to improve its return from Bluewater by reducing the current 5.3 per cent void rate to the current average within its retail portfolio of 2.6 per cent. To help achieve this, it plans to combine some of the smaller units into bigger units, which are more attractive to retailers, while enhancing the leisure and catering facilities on offer.

UBS says…

Neutral. We believe the Bluewater acquisition makes sense. Intense competition for quality retail outlets goes some way to explaining the modest initial yield; it brings the group its first top-ten shopping centre; and it comes with land adjacent to existing holdings in Ebbsfleet. This is an area recently earmarked by the government for development as a garden city, with initial plans for 15,000 new homes. The acquisition cost is unlikely to boost net debt significantly, as we expect to see further asset sales later this year. Expect book value in March 2015 of 1,125p a share (up from 1,013p in 2014).

Liberum says…

Hold. Bluewater marks an upgrade relative to recent asset sales, but we struggle to see the purchase as materially value-creative in its own right. Success will ultimately depend on the company's ability to deliver above-inflation rental growth in a sector where rental growth has been lagging economic growth. Land Securities has also paid a high price. Other recent mega-mall deals include Meadowhall at a net initial yield of 5.1 per cent and the Bullring at 5.7 per cent. We forecast adjusted book value of 1,124p next March.